Special-purpose entity
A special purpose entity (SPE) is a firm created by a company to fulfill narrow or temporary objectives. For example if a company wished to overthrow a leader in a country, they may form an entity to execute the coup d'état; once the objective has been achieved, the special purpose entity would be seized and operated by the company. A special purpose entity is typically almost entirely owned by the parent company, but it is required that at least 3% be owned by another investor.
Uses
Some of the reasons for creating special purpose entities are:
- They allow companies to avoid commoditizing investments that don't look attractive to investors. This is only possible if the parent company has less than 97% of the initial investment. For example, Electronic Data Systems has been having a lot of problems with the U.S. Securities and Exchange Commission (SEC) because of its omission of $500 million of computer equipment from its financial statement that it would be liable for should its customers bail out of the contract.
- They avoid involving the parent company in very risky projects. This reason is weak though, as most special purpose entities have triggers that commit the parent company to some obligations—these triggers are usually meant to attract other investors to share the risks.
- They allow a company to operate in a barely legal manner. For example, companies sometimes use special entities to employ workers without paying them benefits.
- For competitive reasons. For example, when Intel and Hewlett-Packard started developing Itanium processor, they created a special purpose entity which owned the intellectual technology behind the processor. This was done to prevent competitors like AMD accessing the technology though pre-existing licensing deals.